AN ECONOMETRIC ESTIMATION OF PRODUCTION FUNCTION IN INDIAN MACHINERY AND MACHINE TOOLS INDUSTRY DURING PRE AND POST ECONOMIC

LIBERALISATION PERIOD
V.Anbumani* INTRODUCTION In this paper, we attempt an econometric estimation of production function in Indian machinery and machine tools industry and also test the hypothesis that machinery and machine tools Industry is expected to reap better economies of scale in a competitive environment. We try to resolve some econometric issues such as Autocorrelation in the production function estimates by adopting different solutions and adjustment procedures with a view to obtain reliable parameter estimates. PROBLEM STATED: Autocorrelation With autocorrelated values of the disturbance term, the OLS variances of the parameters estimates are likely to be larger than those of other econometric methods. In otherwords the OLS variances of the estimate b1 is larger when the us are positively autocorrelated and the values of X are also positively autocorrelated. The variance of the random term u may be seriously underestimated if the us are autocorrelated. In particular, the underestimation of the variance of u will be more serious in the case of positive autocorrelation of the error term (ut) and of positively autocorrelated values of X in successive time periods. If both u and X are positively autocorrelated, then the OLS formula (e2/(n-2) will most likely underestimate u , because it would ignore the
2

M.Saravanakumar**

expression in parentheses which is almost certainly positive. Therefore, while estimating the production function, there is a necessity to detect the existence of autocorrelation, neutralize the autocorrelative effect, and re-estimate the model for correct results. *Professor, Department of Economics, Bharathiar University, Coimbatore 46. **Research Scholar, Department of Economics, Bharathiar University, Cbe 46.

Scope The study covers the period 1980-2004. The data for the selected product groups have been collected from the Annual Survey of Industries (ASI). There are 16 product groups as per three digit classification (NIC code 1987) and data pertaining to all these units for the period 1980-2004 have been collected. Data Collection: The data source for the selected product groups was the Annual Survey of Industries (ASI). Data Analysis Apart from the conventional mathematical, statistical and econometric tools, to detect the existence of autocorrelation, we have applied Durbin-Watson test. To estimate the production function Cobb-Douglas method was used. Table - 1 INDIAN MACHINERY AND MACHINE TOOLS INDUSTRY (NON-ELECTRICAL&ELECTRICAL)
S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Code 350 351 352 353 354 355 356 357 358+ 367 359 360 361 362 363 364 365 366 368 Product Groups NON-ELECTRICAL MACHINERY Agricultural machinery Equipment and parts Construction/Mining machinery and equipment Prime movers, Boilers, Steam generating plants and Nuclear Reactors Industrial machinery for Food and Textile Industries(including bottling and filling machinery) Industrial machinery for other than Food and Textile industries (other machinery) Refrigerators, Air conditioners and Fire fighting equipment General purpose machinery Machine tools, parts and Accessories Office, Computing and Accounting Machinery Special purpose Machinery ELECTRICAL MACHINERY Electrical Industrial Machinery Insulated wires &cables, including optical Fibre cables Accumulators, primary cells and Primary Batteries Electric Lamps Electric fans and Electrothermic domestic appliances Apparatus for ratio broad casting, Television transmission, Rator apparatus and Apparatus for Radio/line telephony and Line telegraphy Television receivers, Radio telephony/Telegraphy, Video recording or Reproducing apparatus, Record players, Sound recording apparatus, Amplifiers, etc

19

369

Electronic values and tubes and other Electronic Components. Radio graphic X-ray apparatus, X-ray tubes &parts & Electrical equipment N. E. C

Production Function The production function is purely a technical relation, which connects factor inputs and outputs. It describes the Laws of proportion, i.e., the transformation of factor inputs into outputs at any particular time period. The production function represents the technology of a firm or an industry, or the economy as a whole, and it includes all the technically efficient methods of production. Conceptual Framework Production in a manufacturing enterprise is a value adding process. A production function shows the maximum amount of output attainable from a particular set of inputs. If there are only two inputs Capital and Labour, the function can be expressed as Y = f (K, L) where Y = Output, K = Capital and L = Labour input.

Output is typically measured as value added by manufacture in a year. In a time series analysis, it is deflated for price changes. It can also be measured as the gross value of output or the volume of output produced in a year. Inputs are measured in terms of services of the input per unit of time. But this kind of data is generally not available. So in empirical studies inputs are measured by the amount of input made available or utilized in the production process. The number of man-days or man hours worked or wages paid or number of persons employed measures the input of labour. The capital

input is measured by the amount of capital stock either gross (or) net utilized in the production process. Production functions involve and can provide measurements for the following concepts, and one among them is the efficiency of production, which we plan to estimate in this paper. 1. The marginal productivity of the factors of production 2. Factor intensity 3. The returns to scale

Efficiency of Production The Organizational Efficiency is measured by the co-efficient 0. Intuitively it is clear that if two firms have the same K, L, 1, 2 and still produce different quantities of output, the difference is due to the superior organization and entrepreneurship of one of the firms, which result in different efficiencies. The more efficient firm will have a larger 0 than the less efficient one. The Model Cobb-Douglas Production Function is one of the most widely used production function in Economics and Management research. This production function not only satisfies the basic economic law but also easy in its computation and interpretation of the estimated parameters. The objectives of applying Cobb- Douglas production function is to estimate the co-efficient of inputs, their marginal productivities, factor shares in total output and degree of returns to scale. It is based on unitary elasticity of substitution of inputs and this production function has been widely applied in empirical studies. Data Measurement It is customary to take the output in the form of value added or output in real terms and the studied inputs are fixed capital, labour and raw materials. Output is measured in monetary terms; Gross fixed capital consists of book values of land, buildings, plant, machinery, transport equipment and other fixed assets such as furniture

and fixture. Labour is measured in terms of number of workmen employed or wages and salaries paid and the raw material is measured in real terms. Mathematical Formulation The following model was applied to data on output and input for estimating the CD function. Y=AK L R Where Y = output K = Gross Block L = wages & salaries of Employees R = Quantity of Raw materials A = Efficiency parameter = Co- efficient of capital = Co- efficient of Labour = Co efficient of raw materials The logarithm of both sides of the above model was taken to convert the equation into linear form; its log transformation is specified below: log Y = log A + logK + logL + logR + u. The efficiency parameter (A) and the co-efficients of the inputs were estimated by applying the above equation. Parameters , and represent individually the proportionate change in output for a proportionate change in Capital, Labour and Raw materials. The three co-efficients taken together to measure the aggregate proportionate change in output for a given proportionate change in labour, capital and raw material. This implies that + + shows the degree of returns to scale. If + + >1, it would imply that the output increase would be more than proportionate to the increase in inputs, if + + < 1, it would imply that the output

increase would be less than proportionate to the increase in inputs and if + + = 1 the output would just increase proportionately to the rate of increase of inputs. Therefore there will be economies of scale, constant returns to scale or diseconomies of scale depending upon whether + + is less than 1, equal to 1, or greater than 1. This implies that the CD production function can represent any degree of returns to scale. Theoretically we expect that all the input co-efficients shall have a positive sign and greater than zero i.e., > 0, > 0, > 0.

Estimation of Production Function during pre liberalisation period: Table 2 presents the results of Cobb-Douglas production during pre-liberalisation period (1980-1991). The table consist of efficiency parameter (A), Capital coefficient (1), Labour coefficient (2), Economies of scale coefficient(s), Coefficient of determination R2, Durbin Watson d statistic. The Durbin Watson static shows the presence of autocorrelation in 6 product groups. Capital co-efficient assumed negative sign in one product group and labour coefficient in 7 product groups. Since the input co-efficeints do not confirm to theoretical specifications, we do not draw any inference at this stage. Table - 2 Estimation of Production Function during pre liberalisation period (Raw Results)
CODE 350 351 352 353 354 355+363+36 4 356 A 1.4983 (0.9921) 0.4267 (0.5011) 4.8133 (2.598)** 7.5765 (1.390) 0.9384 (0.587) 0.0412 (0.028) 1.0912 (2.947)** Fixed Capital 1 0.9921 (0.0774) -0.01411 (-0.057) 1.0489 (10.414)* 0.6072 (2.306)** 0.9982 (11.831)* 0.9208 (11.058)* 0.9819 (14.455)* Labour 2 -0.0774 (-0.805) 0.9826 (0.014) -0.21168 (-2.101)** -0.2695 (-1.025) -0.0432 (-0.512) 0.1134 (1.362) -0.0338 (-0.498)
Returns to Scale S

R2 0.967 0.9318 0.936 0.6315 0.9564 0.984 0.9631

D.W 1.3364 1.8383 2.4382 0.7775 2.5967 1.1756 2.1472

0.9147 0.9681 0.837 0.338 0.954 1.034 0.947

10.4054 0.6055 -0.3667 0.239 (2.083)** (2.215)** (-1.341) 358+367 0.4187 0.9775 0.0278 1.255 (0.294) (14.296)* (0.406) 359 10.4197 0.9155 0.1101 1.025 (0.088) (9.422)* (1.133) 360 8.5526 0.8775 0.1561 1.033 (0.015) (11.810)* (2.1011)** 361 6.2878 0.8862 0.1493 1.035 (0.169) (8.322)* (1.402) 362 4.4428 0.9255 -0.1564 0.7691 (5.451) (18.725) (-3.166) 365+366 2.8920 0.7929 0.2061 0.998 (0.072) (5.242)* (1.362) 368 4.5477 0.0561 0.9303 0.986 (7.328)* (0.475) (7.877)* 369 0.0120 0.4920 0.4711 0.963 (0.130) (2.165)** (2.073)** *Significant at 1 per cent level, ** significant at 5 percent level

357

0.4216 0.9632 0.9390 0.9750 0.9280 0.9828 0.9765 0.9391 0.7852

1.3577 2.0548 3.1558 1.7521 1.3530 0.22483 1.6636 2.3704 2.0989

Instead we have included material consumed as an additional Input variable (X 3) and estimated the production function parameters and the results are presented in table 3. Table 3: After the inclusion of an additional input variable (X3) there is some improvement in the autocorrelation front. But the input co-efficient assumed negative sign in some of the product groups. Still t values were not statistically significant in some of the product groups. We have introduced wages and salaries as a proxy to labour (X 2) and estimated the co-efficients and the results are presented in table 4. Table 3 Estimation of Production Function during pre liberalisation period (After the inclusion of an additional input variable)
CODE 350 351 352 353 354 355+363+364 356

A
0.7914 ( 2.647)** 0.0568 (4.083)* 1.1067 (1.186) 0.6441 (5.685)* 0.3749 (0.894) 0.7528 (0.331) 0.6693 (9.389)*

Fixed Capital 1 0.0122 (0.334) 0.2641 (0.234) 0.8999 (5.731)* 0.9254 (1.641) 0.9684 (10.535)* 1.2949 (15.894)* 0.99973 (9.439)*

Labour 2 -0.0152 (-1.498) 0.7421 (1.703) -0.0290 (-0.494) 0.1366 (2.544)** 0.0159 (0.705) 0.0211 (1.345) -0.1187 (-0.882)

Material Consumed 3 0.9921 (27.774)* 0.0592 (0.912) 0.1105 (0.632) -0.669 (-1.924) 0.0238 (0.251) -0.3123 (-3.960)* 0.1216 (1.259)

Returns to scale S 0.989 1.039 0.981 1.002 1.008 1.193 1.000

R2 0.9994 0.973 0.9890 0.9983 0.9974 0.9988 0.9983

D.W 1.8891 2.101 2.0671 2.2125 1.9021 1.8078 2.4418

357 358+367 359 360 361 362 365+366 368 369

1.3895 (0.454) 0.9766 (2.288)** 6.883 (0.137) 0.3612 (7.259)* 1.8600 (3.934)* 2.47300 (2.424)* 0.2684 (0.039) 0.5470 (0.355)

0.8951 (5.044)* 0.9795 (9.159)* 0.1731 (1.069) 1.1126 (0.229)* 1.013 (2.707)** 0.4962 (2.472)* 0.8375 (16.021)* 0.0138 (0.483)

-0.0079 (-0.051) -0.0005 (-0.028) 0.0932 (0.956) -0.164 (-1.349) -0.3030 (-0.081) -0.0816 (-1.662) 0.0813 (2.962)** 0.0972 (1.251)

0.0688 (0.399) 0.0194 (0.182) 0.7774 (4.826)* 0.0476 (0.363) 0.6521 (1.256) 0.4687 (2.483)* 0.0868 (1.691) 0.8950 (11.510)*

0.956 0.998 1.043 0.995 1.362 0.882 0.938 1.006 1.001

0.8752 0.9971 0.9476 0.996 0.963 0.9908 0.9993 0.9969 0.9754

1.1509 1.7958 2.8091 2.603 2.2012 1.5911 1.9205 1.0825 1.5882

0.6448 0.9332 -0.0367 0.1045 (0.751) (7.355)* (-0.342) (1.070) * Significant at 1 per cent level. ** Significant at 1 per cent level

Table - 4 Estimation of Production Function during pre liberalisation period (After inclusion of instrumental variable)
CODE 350 351 352 353 354 355+363+364 356 357 358+367 359 360 361 362 365+366 368 369

A
1.0731 (4.083)* 1.073 (4.083)* 0.887 (3.461)* 0.6441 (5.685)* 0.5833 (5.000)* 7.3552 (0.020) 0.6693 (9.389)* 1.0041 (2.177)** 0.8470 (5.803)* 0.089 (0.311) 0.361 (7.259)* 0.1146 (0.077) 0.9533 (0.823) 0.631 (9.876)* 0.431 (7.858)* 0.7402 (6.310)*

Fixed Capital 1 0.3399 (1.9665) 0.339 (1.966) 0.228 (0.873) 0.9254 (5.685)* 0.8555 (7.452)* 1.1817 (8.717)* 0.9973 (9.439)* 0.4587 (1.240) 0.9505 (9.103)* 0.039 (0.329) 1.112 (7.259)* 0.1596 (1.893) 0.8737 (3.257)* 0.876 (10.219)* 0.683 (9.310)* 0.4891 (6.492)*

Wages &Salaries 2 0.0593 (0.912) 0.641 (3.703)* 0.413 (1.197) 0.1366 (2.544)** 0.1324 (1.229) 1.1817 (1.526) -0.1187 (-0.882) 0.5068 (1.289) 0.034 (0.927) 0.718 (3.210)* -0.164 (-1.349) 0.0529 (1.609) 0.0273 (0.434) 0.005 (0.112) 0.316 (4.234)* 0.0644 (6.353)*

Material Consumed 3 0.6417 (3.703)* 0.059 (0.912) 0.809 (4.955)* -0.0669 (-1.924) 0.01289 (0.146) 0.0383 (1.630) 0.1216 (1.259) -0.0068 (-0.045) 0.019 (0.190) 0.243 (1.195) 0.047 (0.363) 0.8169 (9.278)* 0.1071 (0.421) 0.119 (1.590) 0.004 (0.281) -0.0981 (-2.00)**

Returns to scale S 1.0409 1.039 1.45 1.002 0.999 2.4017 1.000 0.972 1.003 1.00 0.995 1.281 1.008 1.00 1.003 0.4557

R2 0.9731 0.973 0.990 0.9983 0.9977 0.9971 0.9983 0.8991 0.997 0.976 0.996 0.9946 0.9832 0.998 0.998 0.996

D.W 2.0115 1.101 1.663 1.2125 2.2167 2.232 1.4418 1.8444 1.901 1.821 2.603 2.0062 1.4385 2.254 2.584 1.090

* Significant at 5 per cent level. ** Significant at 1 per cent level

Table 4: After introducing the proxy, the results have improved. Organisational efficiency A and capital co-efficients are positive and statistically significant in 10 out of 16 product groups.

Wages co-efficient is positive in 14 product groups and statistically significant in 5 product groups. Material co-efficient is positive in 13 product groups and statistically significant in 4 product groups. The Durbin Watson result shows the presence of autocorrelation in 8 product groups. In order to neutralize the auto correlative effect we have adopted the following procedures: Autocorrelation The Durbin Watson statistic computed confirmed the presence of Autocorrelation. Autocorrelation is a special case of correlation. It refers to the relationship not between two (or more) X variables but between the successive values of the same variable. If the value of u in any particular period is correlated with its own preceding value (or values) we say that there is autocorrelation or serial correlation of the random variable. The simple case of linear relationship between any two successive values of u. ut = ut-1 + t This is known as a first order autoregressive relationship. The fourth assumption of ordinary least squares is that the successive values of the random variable u are temporally independent that is, that the value which u assumes in any one period is independent from the value which it assumed in any previous period. This assumption implies that the covariance of uiand uj is equal to zero. cov(uiuj) = (ui uj) = 0 for (i j) If this assumption is not satisfied, that is, if the value of u in any particular period is correlated with its own preceding value (or values) we say that there is autocorrelation or serial correlation of the random variable. Tests for Autocorrelation Some rough idea of the existence and pattern of autocorrelation may be gained by plotting the regression residuals either against their own lagged values or against time. However, there are more accurate test for the incidence of autocorrelation. The traditionally applied test is the Von Neumann Ratio and the Durbin Watson test.

10

The Von Neumann Ratio

= S2 x
2

( X
t =2 n

X t 1 ) / ( n 1)
2 t

( X
t =2

X ) /n
2

This is the ratio of the first difference of any variable X over the variance X. The Von Neumann Ratio is applicable for directly observed series and for variable which are random, that is, variables whose successive values are not autocorrelated. In the case of the u's, their values are not directly observable, but are estimated from the OLS residual (e's). For large samples (n > 30), the Von Neumann Ratio could be applied.
2

= S2 e

( e
t =2

e t 1 ) / ( n 1)
2 t

( e
t =2

e ) /n
2

However, this is not possible, because the values of the OLS residuals (e's) are not independently distributed even if the population ut's are independently distributed. Hence this test is not applicable for testing the autocorrelation of the u's especially, if the sample is small (n < 30). Due to this problem the Durbin Watson test is widely used in practice. The Durbin Watson Test Durbin and Watson have suggested a test which is applicable to small samples. However the test is appropriate only for the first order autoregressive scheme (ut = ut-1 + t). The test may be outlined as follows: The null hypothesis is Ho: = 0 or Ho: the u's are not autocorrelated with a first order scheme. This hypothesis is tested against the alternative hypothesis H1: 0 or H1: the u's are autocorrelated with a first order scheme. To test the null hypothesis we use the Durbin Watson statistic, i.e.,
d = t =2
n

( e

t n

e t 1 )
2 t

e
t= 1

and the value of d lie between 0 and 4. Firstly, if there is no autocorrelation = 0 and d =2. Thus if from the sample data we find d*=2. We accept that there is no autocorrelation in the function. 11

Secondly, if = +1 , d = 0 and we have perfect positive autocorrelation which is stronger the closer d* is to zero. Thirdly, if = 1 , d= 4 we have perfect negative correlation. Therefore, if 2 < d* <4, there is some degree of negative auto correlation, which is stronger the higher the value of d*. Finally, the empirical d* must be compared with the theoretical values of d, i.e., the values of d which define the critical region of test. Durbin Watson has established upper (dU) and lower (dL) limits for the significance levels of d with 5% and 1% level of significance. The test compares the empirical d* values, calculated from the regression residuals, with the dL and dU is the Durbin Watson tables (4 -dL) and (4-dU). i.e., i. ii. iii. iv. If d* <dL reject the null hypothesis of no autocorrelation and accept that there is positive autocorrelation of the first. If d* > (4-dL) we reject the null hypothesis of no autocorrelation and accept that there is negative autocorrelation of first orders. If dU < d* < (4-dU) we accept the null hypothesis of no autocorrelation. If dL< d* <dU or if (4-dU) < d* < (4-dL) the test inconclusive. Across 16 product groups we found existence of autocorrelation in 8 product groups. Estimation of With help of Ochrane - Orcut iterative method, the value is found out for the autocorrelative infested 8 product groups as explained below. Step 1 : Estimate et et = Yt (0 + 1 Kt + 2 It + 3 Lt) (t=1,2,3,)

In terms of the given "e" is again regressed with et-1 and the values are found out. Step 2 With the help of values, the original data was transformed as shown below (Yt- Yt-1) = 0 (1-) + 1 (Kt- Kt-1) + 2 (It It-1) + 3 (Lt Lt-1) here, Yt - Yt-1 Kt - Kt-1 It - It-1 Lt - Lt-1 ut - ut ut-1 12 = = = = Y* K* I* L*

Step 3 OLS method was applied to the transformed data to obtain the parameters of the production function as indicated below: Yt* = 0 + 1 K* + 2 I* + 3 L* + u* Estimation of production function (after neutralising the autocorrelation effect) Table 5 presents the autocorrelative effect neutralized results viz., capital co-efficient (1), wages co-efficient (2), Co-efficient of Material input (3), A Efficiency parameter (Organisational efficiency). After neutralising the auto correlative effect the organisational Efficiency A is positive in all product groups. Capital co-efficient (1) is positive in 7 product groups and statistically significant in 4 product Groups. Co-efficient of wages (2) is positive in 5 product groups. Material input co-efficient (3) is positive in all product groups, but statistically significant in 3 product groups. After Neutralising the data Durbin Watson results have improved. Table - 5 Estimation of Production function during pre liberalisation period (After neutralising Autocorrelative effect)
CODE 351 353 359 360 361 365+366 368 369 A 0.1115 (0.409) 0.6919 (0.779) 0.0690 (0.297) 0.4845 (0.272) 0.1003 (0.072) 2.7534 (1.968) 0.0493 (0.098) 1.5310 (1.189) Fixed Capital 1 0.9243 (11.665)* 0.7613 (9.315)* -0.0868 (-0.455) 0.0401 (0.448) 1.1413 (0.210)* 0.4933 (1.817) 0.9508 (17.606)* 1.5310 (0.406) Wages 2 0.1845 (1.263) -0.163 (-0.347) 0.3651 (4.240)* 0.0405 (0.334) 0.0458 (0.401) -0.1649 (-1.945) -0.0145 (-0.177) 0.4052 (0.222) Material Consumed 3 0.2491 (1.487) 0.2652 (3.203)* 0.7806 (5.479)* 0.9934 (7.465)* 0.2564 (0.973) 0.4374 (1.707) 0.0680 (1.137) 0.5510 (0.221) Returns to scale S 0.988 1.010 1.232 1.074 1.443 0.765 1.04 2.4872 R2 0.9864 0.9873 0.9885 0.9657 0.9717 0.9733 0.9983 0.7052 D.W 2.5573 3.2195 2.1785 1.7164 2.4445 1.8689 1.4561 1.8833

* Significant at 5 per cent level. ** Significant at 1 per cent level

13

Final Results during pre liberalisation period In all we have adopted two approaches to estimate the production function parameters: 1. Current Prices approach. 2. Auto correlation neutralization approach. RESULTS AND DISCUSSIONS The best results obtained for each product group out of these approaches are presented in table 6. Efficiency Parameter A It is to be noted that efficiency parameter A is positive in all product groups. The implication is that organisational efficiency is high, proactive, positively contributes to output and its contribution is explicitly significant in output generation. As regards, entrepreneurial abilities are concerned it is efficient in 7 product groups. Capital co-efficient 1 Elasticity of capital with reference to output (1) is positive in all product groups, but statistically significant in 9 product groups. Wages co-efficient 2 Wages co-efficient is positive in all product groups and statistically significant in 3 product groups. The implication is that wages are proactive, contributes positively to output and its contribution is conspicuous in most of the product groups Material Consumed Co-efficient 3 An encouraging factor noticed from the results is that Material Consumed is positive all product groups, but statistically significant in 3 product groups. The implication is that Material consumed is proactive, and contributes positively to output. Economies of Scale: The sum of co-efficient indicates returns to scale and in this study 8 product groups had recorded Increasing Returns to Scale, 7 product groups Constant Returns to scale and only one Product group had recorded Diminishing Returns to scale.

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Factor Shares: The share of Factor Share of Capital is much higher in most of the Product Groups followed by Materials Consumed and labour (Wages &Salaries).The result asserted the importance of the Capital input in this industry. Table - 6 Estimation of Production Function during Pre-Liberalisation Period (Final Result)
CODE 350 351 352 353 354 355+363 +364 356 357 358+367 359 360 361 362 365+366 368 369 A 1.0731 (4.083)* 7.3552 (1.692) 0.887 (3.461)* 0.1480 (0.277) 0.5833 (5.000)* 7.3552 (0.020) 0.6420 (6.886)* 1.0041 (2.177)** 0.5062 (1.836) 0.089 (0.311) 0.0438 (0.042) 0.1146 (0.077) 0.9533 (0.823) 0.631 (9.876)* 0.431 (7.858)* 0.3248 (0.530) Fixed capital 1 0.3399 (1.9665) 0.7340 (7.347)* 0.228 (0.873) 1.0173 (0.277) 0.8555 (7.452)* 1.1817 (8.717)* 0.9454 (11.978)* 0.4587 (1.240) 0.6336 (1.836) 0.039 (0.329) 0.9791 (6.728)* 0.1596 (1.893) 0.8737 (3.257)* 0.876 (10.219)* 0.6838 (9.310)* 0.8494 (6.061)* Wages and Salaries 2 0.0593 (0.912) 0.2862 (2.974)** 0.413 (1.197) 0.0348 (1.388) 0.1324 1.229) 1.1817 (1.526) 0.0116 (0.722) 0.0068 (0.045) 0.2253 (0.713) 0.718 (3.210)* 0.0182 (0.396) 0.0529 (1.609) 0.1707 (0.421) 0.005 (0.112) 0.316 (4.234)* 0.1521 (1.317) Material consumed 3 0.6417 (3.703)* 0.1020 (1.369) 0.809 (4.955)* 0.0045 (0.151) 0.01289 (0.146) 0.0383 (1.630) 0.0548 (0.694) 0.5068 (1.289) 0.1622 (0.713) 0.243 (1.195) 0.0034 (0.024) 0.8169 (9.278)* 0.273 (0.434) 0.119 (1.590) 0.004 (0.281) 0.0053 (0.057) Returns to scale S 1.0409 1.1223 1.4503 1.0566 1.000 2.4017 1.0018 0.9723 1.0211 1.000 1.0028 1.029 1.008 1.000 1.005 1.006 R2 0.9731 0.9648 0.9905 0.9974 0.9977 0.997 0.9982 0.8991 0.9868 0.9764 0.9953 0.9946 0.9832 0.9985 0.9981 0.9769 D.W 2.0115 1.6716 1.6634 2.7375 2.2167 2.232 1.6856 1.8445 2.0158 1.8216 1.7337 2.0062 1.528 2.254 2.584 1.5946 1/S 32 65 16 96 86 49 94 47 62 4 97 16 87 87 68 84 2/S 7 25 28 3 13 49 1 1 22 72 2 5 3 1 31 15 3/S 61 10 56 1 1 2 5 52 16 24 1 79 10 12 1 1

* Significant at 5 per cent level. ** Significant at 1 per cent level

15

Estimation of Production Function during post liberalisation period: Table 7 presents the results of Cobb- Douglas Production function during post liberalisation period (1991-2001). The table consist of efficiency parameter (A), Capital coefficient (1), Labour coefficient (2), Economics of scale coefficient (s), and Coefficient of determination R2, Durbin Watson d statistic. Capital co-efficient assumed positive sign in all product group and labour coefficient in 2 product groups. Since the input co-efficeints do not confirm to the theoretical specifications. We do not draw any inference at this stage. Instead we have included material consumed as an additional Input variable (X3) and estimated the production function parameters and the results are presented in the table 9. Table 8: After the inclusion of an additional input variable (X3) there is some improvement in the autocorrelation front. But the input co-efficient assumed negative sign in some product groups. Still t values were not statistically significant in some of product groups. We have introduced wages and salaries as a proxy to labour (X 2) and estimated the co-efficient and the results are presented in table 9. After introducing the proxy, the results have improved. The organisational efficiency A is positive in all product groups. Capital co-efficient is positive in 15 product groups and statistically significant in 11 product groups. Wages co-efficient is positive in all product groups and statistically significant in 4 product groups and Material input co-efficient is positive in 15 product groups and statistically significant in 8 product groups. We have selected this table to obtain the final result. The Durbin Watsond statistics shows the autocorrelation effect in 8 product groups. In order to neutralize the auto correlative effect we have adopted the procedures as the same in the previous chapter. Among 16 product groups, we have neutralised autocorrelation in 9 product groups and the results are presented in table 10.

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Table - 7 Estimation of Production Function for during post liberalisation period

Code 350 351 352 353 354 355+363+364 356 357 358+367 359 360 361 362 365+366 368 369

A
1.9812 (4.669)* 1.9501 (1.093) 0.8206 (1.823) 2.2923 (0.723) 1.4846 (1.744) 1.9074 (4.385)* 0.1035 (0.129) -2.6033 (-1.951) -0.5971 (-0.444) 0.1768 (0.1908) -0.5666 (-0.237) -0.4651 (-0.217) 1.5242 (0.707) 0.9341 (0.363) 1.6422 (2.910)* 1.591 (0.850)

Fixed Capital 1 0.9886 (11.409)* 0.829 (3.619)* 0.900 (8.787)* 0.901 (5.287)* 1.010 (8.646)* 0.777 (2.314) 0.945 (4.759)* 0.7791 (4.332)* 0.6894 (2.855)** 0.6324 (2.240)** 0.986 (6.800) 0.923 (6.423)* 0.854 (4.366)* 0.7872 (3.181)* 0.1964 (0.632) 0.817 (2.352)*

Labour 2 0.0903 (1.042) 0.0764) (0.333) 0.1345 (1.316) 0.0277 (1.356) -0.0575 (8.646)* 0.1842 (0.548) -0.0095 (-0.046) 0.7792 (1.309) 0.2398 (0.992) 0.3251 (1.151) 0.2075 (1.427) 0.2161 (1.329) 0.1056 (0.540) 0.0772 (0.311) 0.7843 (0.632) 0.0664 (0.190)

Returns to scale
S

R2 1.078 0.905 1.034 0.928 0.953 1.275 0.936 0.724 0.752 0.974 1.193 1.194 0.959 0.63 0.955 0.985

D.W 1.5643 1.7732 2.2202 1.8483 1.6926 2.5059 1.6904 2.4764 2.4878 1.5506 2.0704 2.0482 2.0626 2.3542 1.7864 1.9099

0.9495 0.659 0.942 0.803 0.946 0.880 0.881 0.753 0.620 0.8236 0.871 0.871 0.873 0.4813 0.935 0.696

* Significant at 5 per cent level. ** Significant at 1 per cent level

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Table - 8 Estimation of Production Function during post liberalisation period

Fixed Capital 1 0.6979 (13.92)* 0.9801 (13.995)* 0.4326 (3.326)* 0.7613 (9.315)* 0.7234 (11.534)* 0.6413 (4.774)* 1.0182 (7.557)* 0.8792 (12.967)* 1.0221 (4.592)* 0.2819 (1.282) 0.0597 (0.266) -0.0977 (-0.421) 0.2411 (1.581) 0.4933 (1.817) 0.9508 (17.606)* 0.6946 (2.503)** Labour 2 -0.0377 (-2.023)** -0.090 (-2.042)** -0.0073 (-0.093) -0.0163 (-0.347) -0.0566 (-2.158)** -0.0039 (-0.057) -0.0498 (-0.750) -0.0834 (-1.777) -0.0188 (-0.156) 0.1234 (0.779) 0.0937 (1.164) 0.0457 (0.387) -0.0084 (-0.089) -0.1649 (-1.945) -0.0145 (-0.177) 0.2306 (1.134) Material Consumed 3 0.3128 (6.114)* 0.0067 (0.093) 0.6006 (5.388)* 0.2652 (3.203)* 0.3224 (4.948)* 0.3766 (2.483)** 0.0127 (0.091) 0.1696 (2.232)** -0.0712 (-0.316) 0.6074 (3.105)* 0.9462 (4.390)* 1.0762 (5.540)* 0.7707 (5.056)* 0.4374 (1.707) 0.0680 (1.137) 0.0757 (0.433) Returns to scale S 0.973 0.896 1.025 1.010 0.988 1.014 0.981 0.965 0.931 1.012 1.099 1.024 1.003 0.765 1.04 1.000

CODE 350 351 352 353 354 355+363+36 4 356 357 358+367 359 360 361 362 365+366 368 369

A
0.2810 (1.930) 0.8092 (2.365)** 0.1914 (0.555) 0.6919 (0.779) 0.6438 (3.151)* 0.8952 (1.216) 0.7627 (0.362) 0.4378 (0.042) 0.9195 (1.154) 6.9518 (0.139) 0.0222 (0.051) 0.0543 (0.155) 0.1281 (0.121) 2.753458 (1.968) 0.04939 (0.098) 0.984228 (2.666)**

R2 0.9984 0.9898 0.9798 0.9873 0.9977 0.9882 0.9887 0.9909 0.9189 0.9662 0.9694 0.9699 0.9760 0.9733 0.9983 0.9865

D.W 1.7522 2.1215 1.9984 3.2195 2.3191 2.2310 2.1655 3.3561 2.0666 0.9821 1.3465 1.2737 2.3946 1.8689 2.4544 2.4560

* Significant at 5 per cent level. ** Significant at 1 per cent level

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Table - 9 Estimation of Production Function during post liberalisation period

Fixed Capital 1 0.5195 (7.923)* 1.2318 (3.381)* 0.5158 (8.320)* 0.6671 (5.728)* 0.7102 (5.650)* 0.5308 (4.411)* 0.9530 (3.948) 0.7267 (9.090)* 1.0767 (5.427)* -0.0868 (-0.455) 0.0401 (0.448) 1.1693 (7.210)* 0.3632 (1.363) 0.7697 (2.955)** 0.9428 (18.69)* 1.5310 (0.406) Wages 2 0.3112 (2.752)** 0.0984 (0.459) 0.1434 (3.463)* 0.00553 (0.006) 0.0734 (0.866) 0.0481 (0.472) 0.0124 (0.069) 0.1053 (3.290)* 0.0827 (0.694) 0.3651 (4.240)* 0.0405 (0.334) 0.0798 (0.401) 0.1869 (0.729) 0.2088 (1.766) 0.0066 (0.092) 0.4052 (0.222) Material Consumed 3 0.7912 (5.060)* -0.4566 (1.207) 0.4442 (6.016)* 0.3472 (3.014)* 0.2254 (1.445) 0.4387 (2.451)** 0.0293 0.126) 0.2586 (3.349)* 0.1901 (1.047) 0.7806 (5.479)* 0.9934 (7.465)* 0.2814 (0.973) 0.8175 (4.887)* 0.0428 (0.164) 0.0547 (0.877) 1.5310 (0.221) Returns to scale

CODE 350 351 352 353 354 355+363+36 4 356 357 358+367 359 360 361 362 365+366 368 369

A
0.2927 (1.899) 0.9668 (0.501) 0.0407 (0.213) 0.2524 (0.784) 0.1713 (0.600) 0.7178 (2.632)** 0.71137 (0.606) 0.1464 (2.779)** 1.1534 (1.907) 0.0690 (0.297) 0.4845 (0.272) 0.2603 (0.072) 1.1967 (0.133) 0.9792 (0.957) 0.8719 (0.495) 0.5810 (1.189)

S
1.621 0.989 1.103 1.014 1.00 1.017 1.00 1.090 1.349 1.232 1.074 1.530 1.367 1.021 1.00 3.467

R2 0.9984 0.8472 0.9945 0.9864 0.9916 0.9912 0.9883 0.9952 0.9391 0.9885 0.9657 0.9717 0.9735 0.9700 0.9980 0.7152

D.W 2.5526 1.9112 2.3414 2.0427 2.4645 2.3232 2.4711 2.6332 2.5152 2.1785 1.7164 1.5447 2.5844 2.164 2.2751 1.8833

* Significant at 5 per cent level. ** Significant at 1 per cent level

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Estimation of Production function during post liberalisation period (after neutralising the autocorrelation effect): Table 10 presents the results viz., Capital coefficient (1), Co-efficient of Material Input ( 2) Labour coefficient of Labour (Wages & Salaries) ( 3). After Neutralising the Auto Correlative effect the Managerial Efficiency A is positive in all Product Groups. Capital Co-efficient (1) is positive in 8 product groups. Wages co-efficient (2) is positive in 6 product groups and Material consumed (3), is positive in all product groups. After Neutralising the Durbin Watson results have improved. Table - 10 Estimation of Production function during post liberalisation period (After neutralising the autocorrelative effect)
CODE 351 353 359 360 361 362 365+366 368 369 Fixed Capital 1 0.9243 (11.665)* 0.7613 (9.315) -0.0868 (-0.455) 0.0401 (0.448) 1.1413 (0.210)* 0.3632 (1.363) 0.4933 (1.817) 0.9508 (17.606) 1.5310 (0.406) wages 2 0.1845 (1.263) -0.163 (-0.347) 0.3651 (4.240)* 0.0405 (0.334) 0.0458 (0.401) 0.1869 (0.729) -0.1649 (-1.945) -0.0145 (-0.177) 0.4052 (0.222) Material Consumed 3 0.2491 (1.487) 0.2652 (3.203) 0.7806 (5.479)* 0.9934 (7.465)* 0.2564 (0.973) 0.8175 (4.887)* 0.4374 (1.707) 0.0680 (1.137) 0.5510 (0.221) Returns to scale S 0.988 1.010 1.232 1.074 1.443 1.367 0.765 1.041 2.4872

A
0.1115 (0.409) 0.6919 (0.779) 0.0690 (0.297) 0.4845 (0.272) 0.1003 (0.072) 1.1967 (0.133) 2.7534 (1.968) 0.493 (0.098) 1.5310 (1.189)

R2 0.9864 0.9873 0.9885 0.9657 0.9717 0.9735 0.9733 0.9983 0.7052

D.W 2.5573 3.2195 2.1785 1.7164 2.4445 2.5844 1.8689 1.4561 1.8833

* Significant at 5 per cent level. ** Significant at 1 per cent level

Final Results during post-liberalisation period The best results obtained for each product group out of these approaches are presented in table 11.

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RESULTS AND DISCUSSION: Efficiency Parameter A It is to be noted that efficiency parameter A is positive in all product groups. The implication is that organised efficiency is high, proactive, positively contributes to output and its contribution is explicitly significant in output generation. As regards, entrepreneurial abilities are concerned it is efficient in almost all product groups. Capital co-efficient (1) Elasticity of capital with reference to output (1) is positive in all product groups. But it is statistically significant in 12 product groups out of 16 product groups. Wages co-efficient (2) Wages co-efficient is positive in all product groups and statistically significant in 4 product groups. The implication is that wages is proactive, contributes positively to output and its contribution is conspicuous in most of the product groups Material co-efficient (3) An encouraging factor noticed from the results is that Material co-efficient elasticity is positive in all product groups and statistically significant in 8 product groups. The implication is that wages are proactive, contributes significantly to output and its contribution is conspicuous in most of the product groups. Economies of Scale: The sum of co-efficient indicates returns to scale and in this study 12 product groups had recorded increasing Returns to Scales and 3 product groups recorded Constant Returns to Scale, and 1 product groups recorded diminishing Returns to scale. Factor Shares: The Percentage share of Factor share of capital is much higher most of the product groups than the Materials consumed and labour (Wages &Salaries).The result asserted the importance of the capital input in this industry.

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Table - 11 Estimation of Production Function during Post Liberalization Period (Final Result)

CODE 350 351 352 353 354 355+363 +364 356 357 358+367 359 360 361 362 365+366 368 369

A 0.2927 (1.899) 0.1115 (0.409) 0.0407 (0.213) 0.2524 (0.784) 0.1713 (0.600) 0.7178 (2.632)** 0.71137 (0.606) 0.1464 (2.779)** 1.1534 (1.907) 0.0690 (0.297) 0.4845 (0.272) 0.2603 (0.072) 1.1967 (0.133) 0.9792 (0.957) 0.8719 (0.495) 1.5310 (1.189)

Capital 1 0.5195 (7.923)* 0.9243 (11.665)* 0.5158 (8.320)* 0.6671 (5.728)* 0.7102 (5.650)* 0.5308 (4.411)* 0.9530 (3.948)* 0.7267 (9.090)* 1.0767 (5.427)* -0.0868 (-0.455) 0.0401 (0.448) 1.1693 (7.210)* 0.3632 (1.363) 0.7697 (2.955)** 0.9428 (18.69)* 1.5310 (0.406)

Wages 2 0.3112 (2.752)** 0.1845 (1.263) 0.1434 (3.463)* 0.00553 (0.006) 0.0734 (0.866) 0.0481 (0.472) 0.0124 (0.069) 0.1053 (3.290)* 0.0827 (0.694) 0.3651 (4.240)* 0.0405 (0.334) 0.0798 (0.401) 0.1869 (0.729) 0.2088 (1.766) 0.0066 (0.092) 0.4052 (0.222)

Material Consumed 3 0.7912 (5.060)* 0.2491 (1.487) 0.4442 (6.016)* 0.3472 (3.014)* 0.2254 (1.445) 0.4387 (2.451)** 0.0293 0.126) 0.2586 (3.349)* 0.1901 (1.047) 0.7806 (5.479)* 0.9934 (7.465)* 0.2814 (0.973) 0.8175 (4.887)* 0.0428 (0.164) 0.0547 (0.877) 0.5510 (0.221)

Returns to scale s

R2

D.W

1/S 32 68 47 65 71 52 96 67 80 7 4 76 27 76 94 61

2/S 19 14 13 1 7 5 1 10 6 30 4 6 13 20 1 16

2/S 49 18 40 34 22 43 3 23 14 63 92 18 60 4 5 23

1.621 0.988 1.103 1.014 1.00 1.017 1.00 1.090 1.349 1.232 1.074 1.530 1.367 1.021 1.00 2.487

0.9984 0.9864 0.9945 0.9864 0.9916 0.9912 0.9883 0.9952 0.9391 0.9885 0.9657 0.9717 0.9735 0.9700 0.9980 0.7052

2.5526 2.5573 2.3414 2.0427 2.4645 2.3232 2.4711 2.6332 2.5152 2.1785 1.7164 1.5447 2.5844 2.164 2.2751 1.8833

* Significant at 5 per cent level. ** Significant at 1 per cent level

Comparative Analysis of Production function estimates during pre and post liberalization period Efficiency Parameter A Organizational efficiency A is positive in all product groups. It is significant in 7 product groups in protected environment, but only in 2 product groups under liberalized regime.

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Capital Coefficient 1 Capital coefficient is positive in all product groups, during both pre and post liberalization period, but indicated higher level of significance in liberalized regime. Labour co-efficient 2 Labour co-efficient is positive in all product groups during pre and post liberalization period, with a higher significance level in a liberalized regime. Material co-efficient 3 Material co-efficient is positive in all product groups, during pre and post liberalization period, again with a higher significance level in a liberalized environment. Returns to Scale: During pre liberalisation period, 8 product groups experienced Increasing returns to scale and 7 product groups showed Decreasing returns to scale .The scenario, slightly increased during post liberalization period, where in 12 product groups indicate Increasing Returns to scale. Thus it is evident that the number of product groups which showed increasing returns to scale, was substantially higher during post liberalization period. Factor Shares: There is change in the proportion of inputs share in the post liberalization period. Liberalised policies have increased the factor shares of capital and Material consumed. Conclusion AN ECONOMETRIC INFERENCES: i) Measurement Variable: Econometrians such as A.Khoutsoyanis (1997), Johnston (1972), Klein (1979) and Intrilligator (1980) are of the view that variables measured in current price need to be adjusted and brought to constant base before adopting them in production function estimates. However in a number of studies variable in current prices are used for the estimation of production function parameters and results interpreted and inferences drawn.

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ii) Neutralization of Autocorrelation effect: Our study also indicates that variables measured in current price do derive acceptable results. The estimation of production function with autocorrelated random term u seriously impairs the significance of parameter estimates and leads to wrong inferences. Therefore, this study has been undertaken. Our analysis indicates that after neutralizing the autocorrelative effect, the results have improved. Therefore, it is concluded that before adopting the variables in production function, there is a necessity to neutralize the auto correlative effect by readjusting the data. Reference: 1. Intriligator, M.D.(1980), Econometric models, techniques, and applications, Prentice Hall of India. 2. Johnston, J. (1972), Econometric Methods, 2nd edition, McGraw-Hill, p.248. 3. Klein, L.R. (1979), Introduction to Econometrics, Prentice-Hall International, London. 4. Koutsoyiannis, A. (1997), Theory of Econometrics, 2nd edition, Macmillan, pp.200-232. 5. Jayanthi, C (2005), A Study of Impact of policy shift on production function and Technical Efficiency in Indian Machinery and Machine Tools Industry, Unpublished, Mphil., Dissertation, Bharathiar University, Coimbatore. *********

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